Is VC Shrinking MEMS?

It is a loaded question with a double meaning, and your response is likely based on personal experience between your MEMS-based organization and venture capital (VC).

In truth, on both accounts the answer is “Yes”. VC money is “shrinking” in dollars and deals, and it is “shrinking”(expression for “enabling”) MEMS development IF your company is in the right technology area and stage of development.

At the recent MEMS Industry Group Executive Congress (a well attended, exciting, and quality gathering of the “doers” in MEMS), the Market Analysis panel rightly observed that there is a barren VC landscape AND to expect an M&A future for many of the existing companies in the market. After all, as offerings (products/services) within a market commoditize, there usually aren’t enough resources or interest to support many separate-but- similar companies.

However, succumbing to this market-pull momentum can discourage the very type of technology-push and disruptive innovation that leaders, like Rich Duncombe of HP (keynote), would recognize as crucial. They NEED disruptive technologies to move past the incremental innovations that will only allow their companies to grow so much, and only make their stockholders SO happy. MEMS has and should continue to provide these breakthroughs. Venture capital is vital to developing the possibility.

Therefore, a challenge to the MEMS community is to use this near-term M&A landscape to actually incentize venture capital. While the MEMS market may never present the blue-sky of biotechnology, it may enable it. This is a power position for MEMS companies that frame the correct technology for competitive environment. It is also a major sales point for VCs looking for a clear exit.

So where is VC today?

The following analysis pulls information from the three most recent (Q1-3, 2010) PWC MoneyTree tracking of venture capital investment within semiconductors. While this industry captures a fraction of the totality, and is under-representative of certain MEMS technologies (e.g. microfludics lost to their classification system under “medical devices”), it provides a platform to display a framework for looking at MEMS from the perspective of VC.

In the big picture, the Semiconductor/MEMS industry has hovered around 5-6% of total VC investment ($/deal), which places it at position 6 of 17 measured industries. Interestingly, the five markets ahead of it comprise over 70% of total VC investment (Software, Biotechnology, Med Devices and Equipment, IT Services, Industrial/Energy). MEMS is an enabling factor in all of these markets. Venture firms with interests in any of these markets will likely support technologies that enable the success of other investments and interests.

Three primary ways to look at the investments are through (see figure at end of report):

Stage (x-axis): Pre-seed, Early Stage, Expansion, Later Stage

Amount (y-axis): Investment in $M USD

Attractiveness (Size of baloons, descriptive text): Number of firms investing

Deals (Stage) and Dollars (Amount)

The table below breaks down the percentage of deals and dollars funded by stage within the semiconductor industry, and within VC community as a whole.

Q,1-3,2010

Dollars ($USD)

Deals

Stage

TOT VC

SEMI

TOT VC

SEMI

Pre-seed

9.1%

5.1%

11.4%

7.5%

Early

24.0%

5.9%

34.3%

9.3%

Expansion

37.2%

34.9%

30.8%

36.4%

Later

29.8%

54.1%

23.5%

46.7%

Semiconductor/MEMS companies are hovering around 4% of total VC deals and 5% of total investment.

Not uncommon to present day VC on the whole, Pre-seed and Early Stage companies are funded as a smaller percentage of the total (Historically ~6% and ~19% respectively).The high risk and number of competing opportunities are a major factor. In other words, VC over time has moved later stage.

You are correct in observing that in recent quarters VCs are funding a disportionately high amount of later stage semiconductor/MEMS firms relative to the market as a whole, and significantly fewer in the early stages.

Within the Semiconductor/MEMS industry this might by a signal that VCs are preferring more established firms that are potentially near exit/more developed. It also might be skewed by categorization of emerging MEMS companies in other markets (losing earlier stage technologies to the Big 5). It is important to remember that on a whole, the Semiconductor industry is remaining relatively flat (~5%), no more, no less and maintaining its position in the grand scheme.

In other words, although it’s signaling a comeback, VC as a whole isn’t as much “venture” as it was ten years ago. So, “MEMS, don’t take it personally.”

Attractiveness

On a positive note, when looking at the nearly 70 reporting Semiconductor/MEMS companies in Q2/3. 2010, it is clear to see that there is investment happening and it is diversified in both source and technology.

Firm

#

VentureTech Alliance

10

Venrock Associates

4

Harris & Harris Group, Inc.

4

ARCH Venture Partners

4

Polaris Venture Capital

3

New Enterprise Associates, Inc.

3

Kleiner Perkins Caufield & Byers

3

DCM

3

Worldview Technology Partners

2

U.S. Venture Partners

2

Storm Ventures LLC

2

Sigma Partners

2

Seqoia Capital

2

Battery Ventures, L.P.

2

Partech International

2

Oak Investment Partners

2

Norwest Venture Partners

2

North Bridge Venture Partners

2

Apex Venture Partners

2

Menlo Ventures

2

Horizon Ventures

2

FreshTracks Capital

2

Draper Fisher Jurvetson

2

Crosslink Capital

2

Source

Over 90 different firms put money in the Semiconductor/MEMS industry over the past two quarters. Twenty-three (23) firms invested in at least two companies (left).

Further investigation yields that these firms also have major stakes in many of the markets that are enabled by MEMS (Big 5). This signals an interest in supporting technologies that boost the potential of other investments within the portfolio.

Attractiveness

Below (call it the “Grand Finale”) is a Semiconductor/MEMS landscape of nearly 50 companies that reported over the passed two quarters.

You can use this map to get a sense of what sorts of technologies are being developed, funded, and to what extent.

Some broad observations:

Energy, consumer product enablers, software (both as an enabler of MEMS, and as a design tool), displays, lighting, and fabless/design are early stage recipients